Synfuels: Doomed Project Shows Industry's Pangs

By S and ra Evans TeeleyMay 17, 1981

Just last July, President Carter signed an agreement with Japan and West Germany for a joint synfuels venture in Morgantown, W. Va., hailing the plan that would turn coal into liquid fuel as "a precursor of wonderful things to come."

Today, the ambitious West Virginia project -- known as Solvent Refined Coal II -- looks more precursed than precusor.

It is on the way to being scrapped, abandoned by all its participants:

The Reagan administration wants to eliminate its funding.

Congress is in no mood to argue.

Gulf Oil, the U.S. private partner in the project, is unwilling to put more money into the plant.

No other company is interested in it.

West Germany is ready to give up on it.

And Japan is feeling double-crossed.

The project is a victim not only of the Reagan administration's free-market philosophy and budget-cutting, but also of congressional charges of mismanagement, cost overruns and delays as well as slackening of the energy crunch and questions about the viability of synfuels projects generally.

"We're seeing the birthing pains of an industry, and it's a question of who will bear the costs," says a staff aide to the House environment and energy subcommittee, who asked not to be named, in a preview post-mortem. "It's a matter of how to allocate resources." But there's another problem with the SRC-II project, he contends: "It's an unmitigated disaster."

The demise of SRC-II may have long-term implications for other synfuels projects, which were to be producing the equivalent of 500,000 barrels of oil a day by 1987 and 2 million barrels a day by 1992, under goals set out in the act creating the synfuels corporation. The United States currently is importing about 6.4 million barrels of oil a day, down substantially from levels when Carter took office.

The SRC-II demonstration plant was designed to convert 6,000 tons a day of high-sulfur coal in to 20,000 barrels a day of synthetic oil. Eventually it was hoped the plant would be expanded, a module at a time, until it could produce up to 100,000 barrels a day of the fuel.

When the project was first conceived, the idea of squeezing America's life-blood from lumps of coal conjured up public visions of energy independence and private dreams of telling OPEC to shovel it.

But opponents of the project point out that the fuel produced by SCR-II would be only an industrial and utility boiler fuel to replace heavy residual fuel and coal, neither of which are in short supply or affect OPEC imports. Supporters of the plan counter that the ultimate goal is to refine the product further into high-quality gasoline and home heating oil, which would help reduce oil imports.

The White House wants to cut funding of SCR-II entirely in fiscal 1982 and has left just enough funding in its fiscal 1981 budget to keep up international appearances while it negotiates the termination of the project with Japan and West Germany.

The administration has suggested the principals -- West Germany, Japan and Gulf Oil -- could make a competitive proposal to the independent Synthetic Fuels Corp. for possible funding. But none of them is interested and, if they were, they would be at the bottom of the synfuels corporation's priority list.

The administration based its funding cuts on its view that the private sector should take a greater share of the risk and contribute a higher share of the estimated $3.4 billion in total costs, rather than relying so heavily on federal money.

Gulf Oil is in for $100 million, including the costs of the site, credit for contractor fees and a credit for the estimated value of the technolgical work Gulf did before the government got involved. Its cash contribution is $15 million. Through a subsidiary, Pittsburgh & Midway Coal Mining Co., Gulf is responsible for the design, management and operation of the plant.

Even before the Reagan budget cuts, the SRC-II plant was coming under harsh attack -- from Rep. Toby Moffett's (D-Conn.) House Government Operations environment and energy subcommittee, from the General Accounting Office and, in more muted tones, from the Energy Department.

Moffett's subcommittee started an investigation into the project last November and concluded there had been unwarrented cost overruns, delays and mismanagement on the part of Gulf.

The original cost estimate of $700 million now has jumped to $3.4 billion, and the project is 15 months behind schedule. About $90 million in government funds already has been spent. Ground was supposed to be broken in Morgantown this year, and construction was to be completed in September 1984, but that date has slipped to December 1985.

After a hearing into these and other difficulties, an irritated Moffett wrote Gulf Oil chairman Jerry McAfee a letter accusing Gulf officials of not being forthcoming in their answers. They had tried to "gloss over the problems" and had "consistently misled the 97th Congress on the true status of the project," Moffett charged.

Gulf and the Energy Department say the higher cost estimates and scheduling delays, in effect, don't count, because accurate figures cannot be reached until the project gets farther along. Gulf also argues that some of the targets of criticism against the project's management and planning are normal aspects of the preconstruction phase of a major project of this kind.

But Moffett also is questioning the relative value of synfuels projects in general, saying their high costs may not be warranted by what he feels may be their rather limited potential.

Or as the subcommittee staffer said, "For $2 billion, you could weatherwise all of New England."

In 1979 an Energy Department evaluation of the proposed project concluded that the performance of Pittsburgh & Midway during the design phase "indicates a need for considerable improvement. Areas where improved performance is desired include internal management, design, cost estimating, scheduling, relationships with DOE and access for DOE to both P&M and third party proprietary data.

"Unless all of these problems are satisfactorily resolved, the success of the SRC-II project will be in jeopardy."

And last July -- just before Carter signed the international agreement -- the GAO prepared a "discussion draft" of a report that has never been issued officially, which added to the list of alleged deficiencies. It criticized the contractor's procurement procedures, the choice of subcontractors and lack of cost controls. The GAO said the Energy Department should have been guiding the project more carefully.

Another GAO report released in February criticized the small amount of private financing and again faulted DOE for poor contracting arrangements.

In 1943, a year before Toby Moffett was born, an 11-year-veteran of Congress from West Virginia flew the 175 miles from Morgantown to Washington in a single-engine Fairchild plane powered by synfuels to dramatize efforts for synfuels legislation.

The next year President Roosevelt signed the congressman's bill to promote the development of synthetic fuels from coal, hailed as a way of ensuring adequate domestic supplies in the post-war future.

"An effort will be made to quiet any fear that now exists that the country may be caught short when its domestic reserves of oil are used up," the United States News declared in a March 1944 article on the bill. "Congress is determined that this country shall not repeat the error it made in rubber by waiting for a crisis before developing a synthetic industry."

N the 1950s, however, President Eisenhower stopped the synfuels program, arguing that supplies were adequate and that private industry would develop the new process if they were needed and viable.

Now, 37 years after he saw Roosevelt sign the first synfuels legislation -- and 38 years after he flew in that synfuels-powered plane -- Sen. Jennings Randolph (D-W.Va.) is experiencing a sense of deja vu.

"In 1981 we are sadly seeing history adversely repeating itself," he says now. Randolph argues that the country would have a working commercial synfuels industry if Eisenhower had not pulled back government support for it before it got off the ground.

Randolph's West Virginia colleague, Senate Minority Leader Robert Byrd, says he hasn't given up on the project but acknowledges he can't see where the funding could come from.

Sources on both sides of the Hill say there is little sentiment for saving the beleaguered project. The House Science and Technology Committee left it out of its energy authorization bill, approved on Thursday, with no discussion.

Byrd met recently with Gulf Chairman McAfee and Vice Presdient W. W. Finley to urge them to increase Gulf's investment in the plant -- but, he reports, he was rebuffed. The meeting made the minority leader pessimistic not only for the Morgantown project but for others like it, as well.

"Based on my discussions with these gentlemen, I have confirmed in my own mind the rather solid and substantial belief that the private sector cannot be counted on to pick up the price tag of these high-risk and expensive synthetic fuels programs," Byrd told a group of reporters recently.

Byrd said he was told that Gulf had looked long and hard at the program and had found it difficult to commit even the original $100 million to it.

His sources also say Gulf virtually has given up on getting government funds for the project and has stopped lobbying for it. A Gulf spokesman said the corporation's only recent congressional activity has been to testify when called. In addition, the company has sent around a memo to its synfuels employes warning they may soon be out of work.

West Germany has lost interest in building the plant because of its increased cost at a time when Germany is going through its own budget austerity, West Germany government sources said. "It seems . . . almost impossible" to continue with the plan now, one German source said.

Japan, meanwhile, feels jilted. A confidential communication from U.S. Ambassador to Japan Mike Mansfield to DOE and the State Department in February said reports of the budget cuts had caused "serious concern" in the Japanese government and industrial sectors. A copy of the cable has been obtained by The Washington Post.

In it, the Japanese were reported as saying they had been pressured by the United States into participating in and out of the Japanese government. And now Japan does not want to go to the quasigovernmental synfuels corportion on the off-chance it would do what the Reagan administration won't.

The United States was told that "if the SRC-II budget is terminated by the U.S. [or West Germany], such action could very well have a significant adverse impact on other bilateral and trilateral energy R&D agreements' with Japan, Mansfield cabled.

Delegates from the United States, Japan and West Germany met in Tokyo in April to discuss the synfuels project and issed a vague joint statment on each other's country's position. Official decisions were postponed until another meeting in June.Short of an astounding turnaround, however, this is likely to be little more than a ceremonial burial.

While Japan warns about what its end would mean for future international cooperation on energy, Byrd sees it also as part of a reversal of recent U.S. efforts at leadership in the global energy field.

"The general dismantling of the energy programs put into place by Congress in the last four years sends a discouraging signal not only to our own people but to the [rest of the world], as well," he declared recently.

And Jennings Randolph, who has seen it happen before, puts this down as one more unfortunate miscalculation: "It will be another sad chapter in the history of synfuels."